The Top Down Approach: This attack is used when an Auditor is executing an audit on the internal controls of a client and is seeking to take which controls to prove. A new Top Down Approach starts with the fiscal statements and the hearers cognition of the hazard associated with the coverage of the clients fiscal statements. The hearer so proceeds with entity-level controls and works downward to major histories, revelations and of import averments that direct the hearers focus to possible stuff misstatement on the fiscal statements and disclosers.
The following measure is to place and prove the entity-level controls which will assist the hearer organize his or her decision on whether or non the client has good internal controls on the fiscal coverage. The information obtained on the entity-level controls will do the hearer to either addition or diminish the sum of proving needed on other controls for the audit.
Controls themselves can change in accurateness and in nature for illustration, some controls are critical in the procedure of internal control nevertheless, they may non hold an impact in the possibility of increasing the opportunities of catching a misstatement. These types of controls can hold a large consequence on the audit if the hearer is non cognizant of the type of controls and how they can impact the result of the audit. A few entity-level controls can be set-up to supervise other lower-level controls. In these instances the hearer needs to cognize if one control is tied to another so that he or she can cut down that sum of proving or on the flipside if a trial fails so they have a lead to follow. If an entity-level control is designed to run at a really high degree of truth and this is known by the hearer, so no farther testing is needed in that peculiar control.
Many types of controls exist for illustration some are straight related to the control environment and others are tied or linked together with other controls to assist guarantee that the internal control system operates efficaciously throughout the organisation. All the controls that a company or client have in topographic point make up the control environment, this environment is non merely based on how many or what types of controls are in topographic point, it is besides a direct contemplation of directions manner of runing the organisation and its internal control system. Furthermore, the environment is besides influenced by unity and values of top direction and how the board or audit commission understands the internal controls of their organisation.
Period-end fiscal coverage procedure, because of its importance the hearer must carefully measure the period-ending fiscal statements in order to guarantee that the internal control procedure worked and therefore the hearer can give a valid sentiment on the fiscal statements. Some of the techniques used by the hearer include ; dealing sums that are recorded on the General Leger and processs used in fixing the one-year or quarterly fiscal statements. As portion of the appraisal the hearer would look into such other systems such as the information engineering system to assist guarantee the truth of the fiscal coverage procedure.
Measuring of import histories, revelations and relevant averments, the hearer should be on the sentinel for relevant averments in the fiscal statements because they have the possibility of incorporating misstatements which in bend would do the fiscal statements to be materially misstated. Assertions include the undermentioned: being or happening and completeness merely to call a few. In order for the hearer to place those histories, disclosers and averments he or she needs to happen the hazard factors associated with each history, discloser or averments. The undermentioned hazard factors are merely a few illustrations: size and composing of the history, volume of activity or complexness and the possible being of related party minutess. These hazard factors help the hearer pinpoint the most likely countries of misstatement. When companies or clients have multiple locations or units so the hearer should utilize the amalgamate fiscal statements in order for them to measure the possible hazard factors.
To happen the beginnings of misstatements the hearer should hold a strong apprehension of the flow minutess and their averments and how they are developed, authorized, processed and recorded. Since a high sum of judgement is required for the audit, the hearer should execute the processs or closely oversee the staff that is making the audits under them as described in AU sec. 322. Furthermore, the hearer should besides hold a good sense of how information engineering ( IT ) affects the company’s/ client ‘s flow of minutess and how that affects the internal control systems. Yet another effectual manner of accomplishing a good audit is to execute a walkthrough of the company’s/ client ‘s procedures. During the walkthroughs the audit squad should be looking for such processs as combination of enquiry, observation, review of relevant certification and re-performance of controls. Besides during these walkthroughs the hearers should be oppugning the company’s/ client ‘s employees on their apprehension of the company ‘s processs and controls.
The hearer ‘s pick on which controls should be tested: the hearer should concentrate on those controls that are most of import to the hearer ‘s decision about the company’s/ client ‘s controls and how they assess the hazard of misstatement in each averment. During the proving there may be more than one control that is signaling assessed hazard of misstatement for one averment. At the same clip nevertheless, one control can be signaling that there is misstatement for two or more averments. Ultimately, the determination to take a control for proving is based on which control or controls address the highest hazard of misstatement on any given averment.
Part B:
A stuff failing is where one or more of a company’s/clients internal controls is non working decently or is non working at all. This ineffectualness will do material misstatement on the fiscal statements. On the other manus a important lack on the internal control system will be less terrible than a material failing. However, a important lack will still necessitate attending by the company ‘s direction and for them to describe it to other parties such as the external hearers and other stakeholders of the company.
Indexs of stuff failing are the undermentioned.
Indications of fraud, stuff or non material.
Restatement of antecedently issued Fiscal Statements
Designation by the external hearer of material misstatement and that it could hold been prevented by the Company’s/ Clients internal control but was non.
Ineffective inadvertence by the external fiscal coverage and internal control by the company ‘s audit commission.
How material failing are reported to the audit commission versus the hearer ‘s study. The external hearer must pass on to the audit commission and direction all stuff failing identified during the audit. This information should be available anterior to the issue of the hearer ‘s study on internal control over fiscal coverage. If the external hearer feels that the audit commission is uneffective, so the hearer must describe its findings to the board of managers.
When sing describing important lacks ; if the external hearer finds any important lacks the hearer would hold to describe them to the audit commission in composing. Furthermore, the hearer should besides pass on with direction in composing about all their lacks in their internal control system. If there are any important lacks the hearer is non required to execute any processs to place all control lacks. The hearer is merely needed to describe the lacks that they are cognizant of that the clip.
